Friday, May 14, 2010

Consumer Spending Has Good Momentum (and a note on Deutsche Bank's Payroll Forecast for May)

The implications of this morning's retail sales data can be summarized as follows:

a) The o.4% increase in both overall retail sales and ex-autos, suggests a healthy momentum of personal spending entering the second quarter and broadly lays the foundation for an annualized gain of 3 1/4-3 1/2% in consumption in the current period. This points to another solid pace of GDP growth in Q2, which, at this distance, is tracking in the 3 1/2 to 4% range.

b) The revisions to the previous few months of retail sales point to an upward revision to first quarter's pace of personal consumption to 3.8% from 3.6% initially reported. This should lead to an upward revision to Q1 GDP growth to 3.5 or 3.6% from the earlier estimate of 3.2%.

c) Combining the above two points, GDP growth is on a 3 3/4% or so track in the first half of 2010, validating the premise of a recovery moving ahead at a sound clip.

d) The consumer remains unfazed in the face of still rising home foreclosures, a stubbornly high unemployment rate, and ongoing tightness in bank lending standards.


Our friends at Deutsche Bank put out a research note yesterday, that has already circulated extensively, predicting a 475,000 nonfarm payroll gain for May. The forecast is based on the entirely reasonable assumption that- given the pattern of hiring observed in the 2000 Census- census workers are likely to show a spike of 250,000, and possibly, more, in May. Then, essentially, this leaves the private payroll gain at about 250,000 for the month, similar to the 231,000 increase in April.

The "warning" for the risk of a high nominal payroll print in May is fair and understandable, but, in a way, the "point" should be almost "pointless" for market participants, as every one's true focus in the last few months has been the ex-census number, which is instantaneously subtracted from the overall print at the moment the data are released. In reality, the attention that the sensible, and obvious, point made by the Deutsche Bank note yesterday, was much ado about nothing, as no one was going to take a census-bloated payroll number in May as anything other than what it is- an utterly immaterial piece of noise.

The only question that remains is whether a 225,000-250,000 private payroll gain is indeed in the cards for May and the answer to that, based on overall labor market trends lately, is a qualified yes.

Anthony Karydakis